FSB backs longer phase-in for new bank rules

Giving banks more time to comply with tougher global capital rules would avoid diluting the new standards, the Financial Stability Board said on Sunday.

The FSB also signaled that the days of credit rating agencies sparking big market moves may be numbered and called for more resources to extend its global reach.

The Group of 20 top countries agreed last year to introduce new bank rules by the end of 2012 as a core effort to apply lessons from the worst financial crisis in over 80 years.

At their summit in Toronto Sunday, G20 leaders agreed to a longer introduction of the Basel III bank capital and liquidity rules, saying 2012 should mark the start rather than the end of implementation.

The Financial Stability Board, tasked by the G20 to coordinate a string of market reforms, said a delay was better than diluting the new rules to meet the original deadline.

We should provide transition arrangements that enable movement to robust new standards without putting the recovery at risk, rather than allow concerns over the transition to weaken the standards, FSB Chairman Mario Draghi said in a letter to the G20 leaders.

We recommend that implementation of these new standards begins in 2012, with a transition horizon informed by the macroeconomic impact assessment now underway, Draghi added.

The FSB will have results of the impact assessment in early August, Draghi told reporters in Toronto, helping determine how fast banks should move to the new standards.

The G20 final communique contains very strong language about the high capital and liquidity levels banks will ultimately have to adopt, Draghi said after the meetings.

It keeps the level of ambition as far as calibration of capital and the definition of capital pretty high, he said.

Basel III toughens up the definition of core capital so that banks can quickly absorb market shocks without having to go cap in hand to taxpayers again.

It marks a victory for intense lobbying by banks and countries such as Japan, Germany and France that say the shift to stricter rules by 2012 would have imposed huge capital- raising burdens on banks and jeopardize lending and economic recovery.

Basel will stop banks from including deferred taxes in core Tier 1 capital, a step that worries Japanese banks.

It also forces banks to phase out so-called hybrid or debt- like capital from core capital, which banks in Europe use widely.

Reasonable phase-in arrangements should reflect different national starting points and circumstances, Draghi said.

G20 leaders reaffirmed their commitment Sunday to finalize Basel III by the time they next meet in Seoul in November.

STRONGER FSB ROLE

Draghi, also governor of the Bank of Italy and member of the European Central Bank, said the FSB should strengthen its operational capacity so it can broaden the circle of countries taking part in its work.

We will work on this and report to you on our progress in your next meetings, Draghi said in his letter.

Beefing up the FSB could raise hackles among some lawmakers, such as in the U.S. Congress, which has traditionally been leery of supranational bodies.

Draghi outlined other FSB work plans for the year.

It published principles Sunday that will lead to concrete recommendations by November to tackle too big to fail banks so that taxpayers will not pay for bailouts again.

The recommendations will include possible extra capital surcharges on big banks with risky operations and structural constraints.

The FSB said new G20 rules to stop bank pay packages from encouraging excessive risk-taking had not been implemented in full and a second review would be undertaken in the second quarter of next year.

DILUTE CREDIT RATINGS

The FSB will also consider additional steps to reduce the role and influence of credit ratings agencies, a global sector dominated by three firms, Standard & Poor's, Fitch and Moody's.

The reliance on ratings in official regulation and prudential rules works against investor diligence and contributes to the 'cliff' effects when credit rating downgrades occur, Draghi said.

European Union policymakers were angered earlier this year when Standard & Poor's downgraded Greek government bonds to junk status just as the bloc was finalizing a bailout for the country.

Critics say the downgrade bumped up the cost of the package and spread concerns about sovereign debt in the wider the euro zone.

The FSB will also come forward in November with recommendations to ensure that as many contracts traded in the $615 trillion off-exchange derivatives market are standardized so they can be centrally cleared to cut risks and improve transparency.